Deal or No Deal?

Question

Marc C. · Answer

Hi, Luis,

Are you asking if this would be a good candidate for development into 15-unit? Or are you wondering if the current $96,000/year Net Operating Income makes this a "deal?"

$96,000 / $2.95M = 3% cap rate. Might as well keep your money in the bank.

So I will assume you are more interested in developing the land. If we put 15 2BR units at 750 sq. ft. each, we will have a building of 11,250/sq. ft. What are the building costs in your area? It being Carlsbad, let's use $125/sq. ft. (PLUS tear-down costs), or $1.406M + $2.95M land cost =$4.36M / 15 units = $290,000 per unit. If you hope to get a reasonable 1.3%/mo. for each unit, then the rents need to be $3770/mo. per unit. I know your area is expensive and all, but are rents for 2BR A-Class units really going for $3770? I doubt it.

Maybe I'm missing something here, but this doesn't sound like any kind of deal that it would be easy to raise money from investors and banks for.

Account Closed · Answer

Hi, @Luis Ortega one of my girls at the office, presented me that project, about 2 months ago is to close to the freeway, for my taste that becomes a problem in carlsbad, at a different price might make since cost of rehab into 15 units with time delays city of carlsbad is gonna give you is super long, if your using your own capital great but if not interest might eat you, Carlsbad Planning is easy to deal with but right now there is so many project applications they are a little overwhelm, I passed on it but maybe is more something in your area of expertise, i just taught it was a bit hard to pencil out.

Dan H. · Answer

I have seen multiple times that due to some regulation the number of units the property is zoned for is not what the property can actually accommodate.  There are increasing number of regulations, etc. that make it unusual to build to the zoning limit of a property.  I know an investor that recently purchased a SFR that was zoned for up to 4 units.  He wanted to put 4 units but he was only able to add a duplex to the SFR (so he got 3 units) and even that took some approved variances.  I do not know the exact regulations that prevented the 4 units.  I know of another property that was zoned for up to 4 units and the owner only was able to build a duplex (it had a duplex but they put in a high end duplex).  The biggest hurdle to more units on this particular property was a mandatory parking per unit regulation.  Kitty corner to this duplex is a double lot that has 8 units (4 units per lot) that was done prior to as severe parking regulations (my family owns the unit right next to this 8-plex and directly actross from the duplex).  So even seeing a quad right next door does not imply that you can build that same quad today.

So I would be surprised if the property actually could have 15 units built on it.

I think @Justin R knows his stuff so I think his rough cost estimate is likely close to accurate.

I consider it too high risk for any potential profit.

Good luck

Rami W. · Answer

https://www.biggerpockets.com/forums/522-investor-...

Same?

Justin R. · Answer

@Luis Ortega I've done development (and am currently doing a 4 home development near the coast further south).

@Marc C. 's numbers are a great start.  I'm not familiar with Carlsbad's specifics, but thise numbers don't take into account Big (note the capital B) costs for water and sewer capacity, school, transportation, permitting, and a bevy of other costs.  You may get your vertical costs for $125/sqft, but the rest of it will cost additional hundreds of thousands.

Bad if you're trying to build anything, but good if you own something - with new development so incredibly expensive, no one will ever build median rental housing in the area and the existing housing stock will continue to demand very attractive rents.  It's an atypical dynamic.

Bac Nguyen · Answer

@ Luis - Good finding and sounds like to have a good deal.

I am also looking to invest in multi-family unit in San Diego. As needed, I know an architecture that work with investors and he knows how to deal with coastal commission and pull permit.

Cheers,

Kevin Fox · Answer

Hey @Luis Ortega

I think @Justin R. & @Marc C. more or less nailed it on the head. Certainly an interesting off-market find with a lot of potential for development, but it really doesn't look Like the numbers will work at the current price.

We should try to find some time to chat, though, if you're seriously considering multi-units in SD. I'd be more than happy to help you assess the alternative strategies available to you as well as assist you with analyzing the feasibility and financials of potential deals. Shoot me a PM if you're interested.

Hope to hear from you soon!

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